[Asia Economy Reporter Hwang Yoon-joo] It is known that when international oil prices rise or fall, refiners gain actual benefits through inventory valuation gains and losses. However, generally, losses are more common through inventory valuation, and reversals are rare. If a refiner experiences inventory gains, it is likely due to the 'lagging effect.'
The lagging effect refers to the time lag in raw material input. It usually takes 1 to 2 months to purchase crude oil from oil-producing countries and bring it into the country. During this period, crude oil prices continue to fluctuate. If a domestic refiner purchases crude oil at $30 per barrel and during the import period the price rises to $50, the refiner can be seen as having gained a profit of $20 per barrel.
The lagging effect refers to the increase in product prices due to rising oil prices, which results in larger margins when refiners actually sell petroleum products. The key point here is petroleum product demand. If only oil prices rise but petroleum product demand remains unchanged, it is ineffective.
The lagging effect also occurs when oil prices fall and refiners import crude oil at lower prices than before. At this time, petroleum product demand must be maintained at the same level as before.
Usually, when global petroleum product demand decreases, international oil prices fall. The recent sharp drop in international oil prices is not simply due to decreased demand. While petroleum product demand is declining due to economic slowdown, the COVID-19 pandemic caused global transportation and industrial demand to shrink suddenly.
In South Korea, gasoline consumption in January this year was 6.15 million barrels, down 16.02% compared to the same period last year, and diesel consumption was 11.77 million barrels, down 23.52%. Gasoline consumption decreased by 5.3% compared to the average consumption (6.5 million barrels) over the past five years (2015?2019), and diesel consumption decreased by 12.0% compared to the average (13.39 million barrels).
Meanwhile, crude oil supply has actually increased due to market share competition among oil-producing countries. After the Organization of the Petroleum Exporting Countries (OPEC) and Russia failed to agree on production cuts, Saudi Arabia announced plans to increase production instead.
As a result, the first-quarter performance of domestic refiners is expected to worsen more than anticipated. With the spread of COVID-19 in Europe, petroleum product consumption is plummeting due to the suspension of European air routes. If the COVID-19 situation intensifies in the United States, one of the largest petroleum product consumers along with China, the rate of petroleum consumption decline is expected to increase further.
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